Seraphim featured in Asian Venture Capital Journal

Space technology is being democratized outside its historical geographic and institutional spheres of development. As private investors get on board, a new range of risks and rewards is coming into focus

From an investor perspective, space is a virtually untapped jurisdiction where the global economy’s latest commodity of choice, data, can be mined almost without restraint by anyone with the courage to fly. Now that courage is becoming increasingly common. The trend was dramatically demonstrated last month with a $90.2 million investment in Japanese lunar exploration company iSpace. The round is being called both Japan’s largest ever Series A and a harbinger of Asia’s growing role in the space sector. Participating VCs include Innovation Network Corporation of Japan (INCJ), Real Tech Fund, and Sparx Group, which plans to follow up with the launch a dedicated space fund that will support data-based industries like autonomous driving.“I think that within 10-20 years, we will see bases on the moon, and within 30-40 years, humans will go to space and back without difficulty,” says Shuhei Abe, CEO of Sparx, pointing to the cost advantages of doing technical R&D in low gravity. “Some people might live there.”The iSpace plan is audacious: it aims to build the first privately funded infrastructure on the moon including a sustainable living environment. Importantly, the deal proves that appetite for such bets now extends beyond risk-happy angels and eccentric aerospace moguls. Strategic backers include Konica Minolta, Suzuki Motor, Dentsu, KDDI, Shimizu, and Toppan Printing. Corporate support underlines an emerging understanding of the practical, data-driven applications of space technology, even where programs bear little resemblance to traditional satellite plays. At the same time, it confirms the sector’s ongoing transition from government-led contracting to private business development.

Creation story

Timelines for the arrival of the entrepreneurial space age typically trace back to around 2008-2010, when Founders Fund-backed SpaceX began conducting the first private rocket launches and orbital maneuvers. Crucially, the US-based company brought transparency to space for the first time by publishing its operational budgets. This lowered the barriers of entry because private companies finally had reliable financial estimates around which they could plan and pitch business models. Since then, the number of private space companies has ballooned globally from around two dozen to some 250. Important coinciding evolutions included the emergence of commercially viable artificial intelligence, which expanded the marketability of existing global positioning and satellite communications technologies. Companies in the nascent ecosystem began expediting their routes to market through cooperation, and what innovation theory academics call an “era of ferment” growth phase started to play out in an environment of tumbling costs. For example, the aggregate capital required to effectuate a first launch has traditionally ranged in the tens of billions of dollars. SpaceX got there for around $1 billion, and new competitors are now touting comprehensive first-launch budgets of less than $100 million. “There’s still a huge amount of risk with space because it’s so technically challenging, but those risks have decreased remarkably over the past couple of years,” says Niki Scevak, a managing director at Blackbird Ventures. “That’s because building a data network in space is now much cheaper than building one on the ground. In space, you can build a global network on a small Series A round of capital.” Blackbird seized this opportunity last year with participation in a A$5 million ($4 million) Series A for Fleet, an Australian space company looking to set up orbital infrastructure for internet-of-things businesses. Such plans rely on a new generation of high-functioning but low-cost satellites known as nanosats or cubesats that are about the size of a loaf of bread and deployed in networked arrays called constellations. Hardware miniaturization has made it cheaper for independent companies to manufacture satellites and install them in space – and these economies are expected to trickle down to earth. In addition to being eyes in the sky, nanosats offer back-end cloud computing options that relieve dependence on expensive ground-based data processing capacity. The earliest adopters will include primary industry players with remote connectivity needs. “Two years ago when we were talking about this market to LPs, it was hard for them to get their minds away from things like asteroid mining and human spaceflight,” says Mark Boggett, CEO of Seraphim Capital. “But now that there is so much more information and venture investment out there, there’s a better understanding that it’s all about the data from space. It’s about looking down at earth rather than looking out. ”Seraphim, a UK-based firm focused entirely on space investment, closed its first fund at $95 million in September after about18 months on the market with major backers including the state-owned British Business Bank and Airbus. Government ties have kept the GP’s mandate pinned to the UK, but it is currently launching a $250 million follow-up fund that will encompass Asia and establish an office in the region. The rapid return with the second fund reflects Seraphim’s view that the global ecosystem of investable companies is expanding as well as a desire to lead more Series A rounds, which typically eclipse the$100 million mark. It also punctuates the soaring sentiment for all things space in recent years and a corresponding growth curve in private investment.

Rocketing growth

According to US space industry consultancy Bryce, total private investment in sector start-ups came to $16.6 billion globally from 2000-16, with the vast majority having been mobilized since 2006.Venture investment during the same period reached $4.5 billion, with 86%invested in the last five years. Space Angels, a US specialist that has been investing the sector since 2007 and raised $50 million for a VC fund in November, estimates that global private equity investments last year alone topped $2 billion as of September. Industry professionals have flagged this eruption as part of a natural hype cycle but stress that space entails a greater danger of distraction due to its exotic, easily romanticized trappings. As technology-based industries mature, companies begin to offer complex routines as a packaged service, and many of the technical details get abstracted out of investor due diligence processes. Space is experiencing this effect to some degree already, but the evolution remains in early days. Most space businesses still involve repeated experimentation, which requires both deep pockets and high technical knowledge. VCs are therefore advised to be fluent in the techno-speak of any potential portfolio company and be able to identify seemingly competent teams that have little more to offer than a taste of adventure. “It’s not that chasing space is a fool’s errand– it’s just that understanding which gutsy thing to allocate your capital to is not always obvious,” says Matt Ocko, a managing partner at Data Collective. “Space attracts fewer charlatans than other sectors but they are more persuasive, more heavily credentialed and can take more of your money. If a VC doesn’t have very sharp investors with deep technical knowledge of the full stack, you’ll lose money or you’ll suffer opportunity costs. ”Data Collective has made a number of space investments, including Planet Labs, a US outfit that operates the world’s largest private constellation with some 150 satellites. In Asia Pacific, the firm contributed to a $75 million Series D for New Zealand-based Rocket Lab, a launch logistics company that is said to be capable of delivering payloads at one-fortieth the cost of SpaceX. Other backers include Promus Ventures, Bessemer Venture Partners, Khosla Ventures and K1W1.Investors are attracted to this segment in part because private rocket companies position themselves as more than just space truckers. The efficiency advantages they achieve are generated by work on manufacturing innovations such as 3D printing, as well as in-house intellectual property (IP) developments in versatile areas such as advanced materials and component reusability. Due to their complexity and heavy equipment requirements, rocket companies represent more than twice as much investment activity as satellite providers in dollar terms, despite being significantly scarcer. Satellite companies, by contrast, are more immediately familiar proposals to VCs: small teams seeking to disrupt traditional business channels in fields with existing customers. In recent years, earth observation has been the most popular use-case, with communications a distant second. It is niche satellite plays, however, that offer the most irrefutable evidence that the space sector’s reputation for uninspired military contracting has finally given way to unfettered entrepreneurialism. Japanese start-up ALE offered a case in point in late 2016 when it received $6million from domestic angels to perfect a method for delivering on-demand artificial shooting star sky shows. ALE was founded in 2011 by Lena Okajima, a PhD in astronomy who previously worked in private equity for Goldman Sachs and calls her business the world’s first space entertainment company. “I think that we can open up a new segment in the space industry,” she says, noting ALE’s potential for technical and commercial evolution. “I hope to use re entry data to study the upper atmosphere and to fit experiments into our shooting star satellites. This will be useful not only for agriculture and furthering medical science, but also aid in the development of new technology and materials. ”A number of industries are expected to look to space as a solution for prohibitively expensive power consumption and internet monitor assets from space is also being explored by insurance companies as a way of better evaluating claims.

Upstream, downstream

Upstream infrastructure investment is considered the best way to vertically integrate value chains as these business models unfold because satellite owners will have potential to acquire proprietary, uniquely marketable data sets. Downstream businesses such as ground-based data analysis, however, are seen as the fastest growing opportunity. “As far as the downstream segments and the use of space data, I think we’re just at the beginning because the range of possible applications is huge,” says Claire Pidancet, managing director at Space Net Ventures. “That’s why we’re staying close to potential end-users as part of our fundraising process – it’s important to build an ecosystem with LPs that can also be business partners for portfolio companies.” Space Net is currently raising its debut vehicle with a target corpus of GBP25 million ($34 million) aimed at early-stage companies exclusively in the data end of the space sector. The idea is that relations with key strategic end-users will help clarify the most needed use-cases among a new breed of start-ups as a raft of new specialist incubators backed by the government drives local deal flow. Downstream investment is considered more accessible to VCs due to its lower cost barriers and crossover potential with non-space sources for data collection including high-altitude drones. For now, it is also seen as having a less exaggerated risk-reward equation than upstream infrastructure plays. “People regard investing in the space technology industry as high-risk, but I don’t think this is the case,” says Kazumasa Watanabe, CEO of Japanese VC a Start. “One of the main issues is that it can take a few years to launch a rocket, which would be an eternity for companies in the IT industry. But the business cycles in the space technology industry are gradually getting shorter, so we will continue to actively invest in companies that meet world standards and win alliances with government agencies. ”One of aStart’s most recent investments is a Japanese equipment start-up called Astroscale that is one of a handful of technology developers globally focused on removing hazardous debris from orbit. The company received a $25 million Series C last year from the likes of INCJ, Jafco, Mitsubishi UFJ Capital and ANA Holdings, the owner of All Nippon Airways, Japan’s largest airline. Although the volume of physical space in low earth orbit exceeds the volume of the earth itself, the projected increase in collision risk that comes with more satellite traffic has become a serious talking point on the space conference circuit. This is because even a pea-sized fragment of junk traveling at high speed has enough impact force to take entire businesses offline. ANA has described the issue as “a matter of high urgency" and sees potential for a strong return on investment with Astroscale. “Space debris has become a major issue and removal services will have social significance as an indispensable infrastructure to ensure the safe operation of spacecraft,” says Yuki Horie, an innovation researcher at ANA’s Digital Design Lab. “We believe that this infrastructure has a lot of synergy with ANA’s plans to expand its business in space.” Debris management will also be a question of regulation since satellites that have outlived their usefulness will be required to elevate to quarantined “graveyard” orbits. This scenario offers a reminder that the formalization of space as a business environment will continue to overlap with the sector’s longstanding geopolitical and national security implications. One of the most immediate regulatory hurdles for private investors is the process of securing rights to the appropriate transmission frequency spectrums from the International Telecommunication Union.

Asian angle

Overall space development momentum, however, remains largely based on the expansion of private control. Even as governments and international bureaucracies express interest in playing along, their role is expected to be tempered by the sector’s growing need to operate at the speed of business. “There’s no doubt that government and regulation play a big role in space, and because the industry is evolving so quickly, there is a lot of uncertainty – but I don’t see that as a problem,” says Chad Anderson, CEO at Space Angels. “If you’re informed, you’re likely to find the good opportunities and do well, but if you’re just jumping in and trying to play in a space that you don’t understand, which a lot of people are doing at the moment, it might not work out so well.” Space Angels – which also invested Planet Labs –is keen to expand its scope of activity into Asia, especially in light of China’s rapid progress. While it took the US a generation to foster an entrepreneurial approach to space, China has mobilized the movement in a matter of years, even if much of the activity remains a murky combination of private and public interests. Near-term plans in the country include a rocket launch schedule that will roughly match that of SpaceX, which ran 18 missions in 2017 and intends to double that rate this year. Commercial integration could be hampered, however, since most Western space companies will not permit anything of material value to travel via Chinese rocket for fear of IP leakage. Meanwhile, start-up ecosystems in Asian jurisdictions, including Japan, are commonly described as having impenetrable corporate ownership structures and debatable valuation metrics. While such concerns have kept the bulk of private investors at bay to date, the region’s massive end-markets and bespoke manufacturing capacity are increasingly being seen as impossible to dismiss. “There is a window of opportunity at the moment where you need to bring new technologies into space as quickly as possible because as companies build out their infrastructure in orbit, it creates a competitive moat against others coming into that market after them,” says Seraphim’s Boggett. “There’s a lot of technology knowhow and IP in Asia that is positioned to do that, and we want to start accessing it.”